Credit Suisse’s epiphany is late and embarrassing

The author is a Reuters Breakingviews columnist. The opnions expressed are his own.

Credit Suisse is closer to making acceptable returns for shareholders – but it has taken too long a road to get there. The Swiss bank on March 23 said it would add an extra 800 million Swiss francs ($821 million) to what it expects to lop off its group cost base by 2018, and shrink its investment bank further. Chief Executive Tidjane Thiam could have done so five months ago, and without the embarrassing goofs that have arisen along the way.

Investors now have light at the end of a tunnel from which the bank should emerge in 2018. If it can cut its group costs to its new 18 billion Swiss francs ($18.5 billion) target by then, it should get near 4.5 billion Swiss francs in earnings. That assumes bad debts stay steady, the tax rate is 30 percent, and Credit Suisse hits the 24.7 billion Swiss francs in revenue forecast by Eikon for that date.

Factor in the 14.6 billion Swiss francs ($15 billion) that is now being cut from the investment bank compared to year-end, and the group as a whole should have risk-weighted assets of around 300 billion Swiss francs. Against that it would need to hold around 39 billion Swiss francs in equity to hit its 2018 capital targets. The earnings it should make by 2018 should get it to a just-about-adequate return in excess of 11 percent.

It’s good that Thiam has bitten the bullet. But considering his grand strategy was unveiled in October, he has done it late. Fixed income revenue was down 61 percent year-on-year in the fourth quarter, and first-quarter trading revenue is now expected to be down 40 percent to 45 percent compared to the same period in 2015. Rotten market conditions didn’t help, but illiquid assets that Credit Suisse remained in helped push the investment bank to almost $1 billion of losses.

Thiam was not aware of the extent of the illiquid positions in October. His last job running insurer Prudential also started with some wobbles from which he subsequently more than recovered. This new strategy leaves the distinct impression that the bank is heading in the right direction, but from the back foot.